June 29, 2017


















Stratetgic Insights # 3

Strategic Insights # 3

DO WELL BY DOING GOOD FOR ALL “FIRST CHOICE” STAKEHOLDERS

Every distributor (location) manager wants to create more personal wealth with less stress and more fun. And, because best service value is totally dependent upon “PEOPLE”, don’t you want to attract and keep the best talent in the channel to work directly or indirectly on behalf of your natural ambitions? A $500MM client - that has outperformed its channel peers for years - has a motto, “To Be First Choice” (for the best people and their efforts within each stakeholder group: employees, customers, suppliers and investors/bankers).

BEST ECONOMIC REWARDS ASSURE “FIRST CHOICE”

Best talent and effort goes to where it is best rewarded. For service industries, there is an inter-dependent, circular process that will deliver 4-way-win economics. (For more on this topic and all other footnotes, go to support notes for the “Insight” series at www.merrifield.com.)

 

The steps are:

1.       Ambitious customers understand and buy best, total, service value that is well-sold to and through their business. If we deliver best value, they will stay, buy more and tell their friends. Retaining best customers who grow our profits is less work, more fun and profitable than scrounging for new customers (profitable or not) to replace the ones we are losing with me-too service differentiated by price.     

2.       To achieve and sell best service value requires, in turn, “first choice” employees well trained and retained. Costco, FedEx, LL Bean and UPS pay the most to hire the best warehouse folks to then train them the most to get a good return on their upfront people investment. Costco pays 142% of what Sam’s/Wal-Mart does, but gets 150-170% better total productivity and profitability numbers with only one-eighth the purchasing clout. In what appears to be a commodity-for-price business, Costco targets customers and creates better service value than Sam’s!

3.       Steps 1 and 2 cause growth in supplier purchases with prompt pay due to excellent reinvested profits. Suppliers then besiege “first choice” distributors with opportunities. In mature channels in which 90% of product sales are for commodities, innovative supply-chain initiatives with best suppliers are vital to step #1 value props. The cycle repeats with more credibility, because trust grows with your track record. 

What do shareholders, banks and managers get from this virtuous cycle? Answers:  faster growth, greater profits, higher ROI, free cash-flow, higher company valuation with maximum “exit strategy” options all with less stress and more fun. How do we start to move towards this dream scenario?

RETHINK COMPETITIVE STRATEGY TO FINANCE “FIRST CHOICE” REWARDS

Competitive strategy is about having lower costs while delivering higher value proposition(s) for targeted customer niches in contrast to competitors who are selling too many things to too many different types of niches. High value at low costs both come from four strategic-focus, design, fit-factors:

1.       With a clear target niche, we can have a precise service value equation and operational metrics for each niche. This allows employees to know exactly what “service excellence” is for what targeted customers and what is economically in it for them. 

2.       We can also design out all unnecessary, excess cost activities. Just as marathoners don’t carry upper-body muscle for their targeted event (while shot putters do and the two don’t compete), we should have no unnecessary overhead or expenditures for capabilities that our targeted customers don’t value.

3.       We can match the cost of service-term bundles to the margin potential for each size group of customers within a niche: small, medium, large and niche-by-themselves whales. Standard service plus or minus a factor or two will over-serve small accounts at a loss and under-serve biggest profit accounts who may be poached by competitors that perfectly focus on them.  

4.       Economies of scale within a niche scope for inventory fill-rates and turns will result from achieving high-share, critical-mass sales from a niche pool of customers. 

What ideologies keep most distributors from seeing and pursuing customer-centric value/cost fitness? Three common ones that need to become subservient to customer-centric strategy are:

1.       Financial management goals and budgets which don’t reveal or intuitively support the first choice or strategic fit economics above. We need systems for both financial management and strategic management needs.

2.       Organizing marketing around product/supplier-centric promotions. With dominant financial thinking, we want to grow sales and margin dollars, but then go after too many types of customers. Lack of customer focus leads to some “new business” in which the cost-to-serve exceeds the margin dollars or we don’t have a value/cost fit advantage. This leads to: more sales, less profit and more debt. Why not tailor supplier promotions to help us sell deeper and better into target niches that we can dominate? Most distributors could double sales with half of the active accounts while tripling profits by selling best niches deeper.  

3.       Pursuing “best practices”. Efficiency savings are good, but they get competed away and being more efficient at structural, losing activity is pointless. Be strategically focused and effective first, then efficient within that focus.  

MEASURE NET-PROFIT CROSS-SUBSIDIES FOR STRATEGIC INSIGHT

To rethink your competitive strategy and put financial management, product promotions, and best practices in their proper, subservient roles, you will need compelling net profit information on: customers, items/suppliers and sales territories. Creating and using strategic, net-profit systems has cost global 2000 firms millions over the past 40 years. Now – thanks to outsourced, turnkey, software service technology – strategic analytics can cost one distribution location $1K per month with 3-month renewals. Each additional branch subscription – for a chain – then has exponentially lower subscription costs. Learn more at www.quantumprofitmanagement.com or www.merrifield.com/quantum.

Bruce Merrifield (Bruce@merrifield.com)